Bloomberg News

Urbi Leads Mexican Homebuilder Stock Plunge on Fitch Warning

February 22, 2013

Mexican homebuilders Urbi (URBI*) Desarrollos Urbanos SAB and Corp. Geo (GEOB) SAB plunged after Fitch Ratings said it may cut their credit ratings, adding to concern the companies will struggle to adapt to new housing policies.

Urbi, the nation’s third-largest publicly traded homebuilder, tumbled 17 percent to 4.14 pesos at the close in Mexico City, the lowest closing price since the shares started trading in 2004. Geo, the second-biggest homebuilder, fell 13 percent to 10.06 pesos, the lowest since November 2008.

Fitch placed the ratings of Urbi and Geo along with their larger competitor Desarrolladora Homex SAB on rating-watch negative today, citing pressure on cash flows, an increase in lending for the purchase of used homes and a lack of clarity on government support for the industry. Mexicali-based Urbi has a Fitch rating of B, five levels below investment grade.

“Cash-flow pressure during 2013 could exacerbate their needs to access capital markets during a period in which investor sentiment toward the sector has waned,” Jose Vertiz, a Fitch director, wrote in the report. “Unless policies are developed in the near future that will help these companies lower their inventory levels and sell their unusable land, rating downgrades are likely.”

Mexico City-based Geo and Culiacan-based Homex are rated BB- by Fitch, three levels below investment grade. Homex shares fell 4 percent to 24.77 pesos.

Land Reserves

Prices on Urbi’s dollar-denominated bonds due 2022 fell to 81 cents on the dollar, sending yields up 0.48 percentage point to 13.46 percent, according to data compiled by Bloomberg.

“Declines like these tell you that there’s little confidence in these companies,” Gerardo Copca, an analyst at Metanalisis SA, said in a telephone interview from Mexico City.

Homebuilders have struggled to adapt to industry changes as the Mexican government shifted housing subsidies to prioritize more capital-intensive apartment construction. It has also de- emphasized subsidies for construction in the countryside, where homebuilders have many properties.

The companies have been saddled with land reserves built before the government’s new policy was implemented, Fitch said in the report.

“The new housing plan from the government might make some of these reserves less usable in the short term, so their value should be somewhat different from what is presently in the books of the company,” said Carlos Hermosillo, an analyst with Grupo Financiero Banorte SAB in Mexico City. “That’s a cause of concern for the market.”

Exceed Limits

Investors also are fretting that fourth-quarter results due to be release next week will be disappointing, Hermosillo said.

Urbi investors relations office Antonio Jorge said in a Feb. 13 telephone interview that the builder had renegotiated or gotten waivers on bank debt covenants it was on the verge of violating “since it was probable that the company was going to exceed these limits in the context of a weaker-than-expected quarter.”

Urbi has the lowest weighting on the benchmark IPC index of 35 Mexican stocks. Geo and Homex are the second- and third- lowest weighted on the gauge, respectively.

Javier Gayol, an analyst with Corporativo GBM SAB, said the risk of getting replaced on the index is adding to the stocks’ woes since membership is partially determined by market capitalization.

“Today’s drop is a bad sign,” he said. “If these share drops persist, they’ll be out.”

To contact the reporters on this story: Danielle Verbrigghe in New York at dverbrigghe@bloomberg.net; Jonathan Levin in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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